Bill Dropping Fees on Foreign Firms Defeated

SACRAMENTO — Despite threats of a trade war by British political leaders and heavy lobbying by multinational companies, the state Senate on Thursday voted down a change in the way California taxes foreign corporations.

The bill by Sen. Alfred E. Alquist (D-San Jose) sought to save multinational companies $70 million by eliminating a fee they must pay when they choose how they are to be taxed.

"I, for one, don't want to challenge the British," Alquist said, describing Britain's threats of economic sanctions against U.S. companies as being "very real."

However, by a 16-19 vote, the legislation was defeated, with Republicans critical of provisions that sought to limit state deductions to make up for the revenue loss.

Senate leaders hoped to revive the measure in an altered form as early as today. A Senate analysis says trade retaliation could cost the state more than $1 billion, and the Clinton Administration reportedly has been pushing for action to avert a potential crisis.

The state taxes multinationals on a so-called unitary system, based on the California proportion of their worldwide property, payroll and sales. In 1988, under pressure from multinational firms from Britain, Japan and elsewhere, the state relaxed the system to allow foreign firms to use an alternate method based only on the profits of their U.S. operations.

To use the alternative system, companies must pay fees that amount to $70 million a year--and that is what Alquist seeks to eliminate. Additionally, the bill would limit the information that foreign firms must disclose about their worldwide operations.

To recoup revenue, Alquist's bill would eliminate the state income tax deduction for membership fees to private clubs and reduce the amount that can be deducted for business meals from 80% to 50%.

The British government has warned of retaliation in the form of new taxes on U.S. companies operating in the United Kingdom.